Mitigating the Economic Downturn
Prasetyantoko
Since the 2008 financial crisis, the global economy has continued to fluctuate, accompanied by disruptions in almost all aspects. In fact, after a decade, the future of the economy is even more uncertain.
The World Bank’s most recent semiannual report on the prospects of the global economy, issued in January 2019, is titled "Darkening Skies". The sky of the global economy is increasingly cloudy, not only due to uncertainty in the economic field, but also because of the escalation of trade conflicts that could end an era of multilateralism. The direction of globalization is being tested.
There are three important global challenges this year, namely the slowdown in trade, the interest rate hike in developed countries and the fluctuation in prices of oil and other commodities. Among these three factors, two factors have a bigger impact on our economy, namely the rise in global interest rates and the fluctuation in oil prices.
The World Bank has lowered its 2019 global growth forecast from 3 percent to 2.9 percent. Over the past two years, global economic growth has continued to fall. After reaching 3.1 percent in 2017, growth fell to 3 percent in 2018, and it could continue to fall to 2.8 percent in 2020. Not only that, the growth projection could be further revised downward due to the uncertainty.
Global growth is also overshadowed by the risk of divergence or out of sync growth patterns. A similar pattern occurred after the 2008 crisis, in which there was a separation of patterns of growth in developed and developing countries. Other times, the fragmentation has become more widespread, so policy coordination has become more difficult.
Growth in developed countries is estimated at 2 percent in 2019 and 1.6 percent in 2020. The economy in developed countries grows slower and tends to decline at a faster pace. This is mainly due to the slowdown in global trade, which has led to a stagnation of production in the industrial sector. Because of that, they are forced to look for new sources of growth, and one of those sources is intensive technological innovation. That is why the disruption of technology is so massive in the post-global crisis era. How can we use this momentum to maximize our domestic potential?
Domestic challenges
The good news is that, even though domestic economic growth is slowing, it is not in a downward cycle. We experience a slowdown in growth, but not a decline. The World Bank estimates Indonesia\'s economic growth at 5.2 percent in 2019 and expects it to rise to 5.3 percent in 2020. If developed countries continue to decline in the medium term, the economies of developing countries such as Indonesia still have the potential to grow, albeit not as fast as before.
The key is to manage the stability amid external pressure and maximize the domestic growth potential. According to the December 2018 edition of the World Bank’s Indonesia Quarterly report titled
"Strengthening Competitiveness", entering the end of 2018, external pressure tended to subside. For our economy, the most crucial pressure is capital outflows and rising oil prices.
The capital outflows have put pressure on rupiah exchange rates and pushed up yields on government bonds. The rupiah has depreciated to about 15,200 per US dollar, and bond yields reached almost 8 percent.
Meanwhile, the increase in oil prices raises the burden of imports and exacerbates the current account deficit. In addition to short-term pressure, the external pressure also comes from trade and investment channels. The global slowdown reduces the export potential, while foreign investment tends to decline.
Because of that, it is necessary to make structural reforms, so that exports and investment continue to contribute to growth. The global challenges are still the same, even though the pressure has subsided.
The increase in the interest rate of the United States Federal Reserve (Fed) has not ended but will only be delayed. Even though the price of oil has fallen over the past few months, that does not mean there is no risk of it rising again. Therefore, policy consolidation is needed as soon as possible, so that when interest rates and oil prices increase, our economy will not be severely affected.
How to do this? First, by reducing the current account deficit by raising exports of manufacturing products. At the end of 2018, even though there was a surplus in the balance of payment, that does not mean that we are free from pressure, because the surplus is due to short-term capital flows. The ideal way to close the deficit is to spur non-commodity exports as commodity prices are still fluctuating.
Second, reducing fuel oil imports by increasing the domestic fuel component from 20 to 30 percent. The implementation needs to be accelerated.
Third, dependence on foreign capital needs to be reduced massively and quickly. The deepening of the financial sector through a number of new financial instruments and expanding their distribution, including involving financial technology, needs to be accelerated. Financial inclusion must be a national agenda.
Fourth, we must attract foreign direct investment, so that the domestic industry will grow faster. Admittedly, the domestic sources of economic growth are still limited, long-term foreign investment is needed.
The sky of the global economy is getting cloudy and the risk of a heavy rain is increasing. We are fortunate to have some time to repair roofs and walls, but that time will pass quickly. Unfortunately, we are now busy with elections. Realizing the magnitude of the global challenge, there is no need to be too focused on the struggle for power. Whoever wins the elections will face the same problem. So, don\'t be late. (A PRASETYANTOKO, Lecturer at Atma Jaya Catholic University Jakarta)
